The growth outlook for the eurozone is deteriorating due to the ongoing war in Iran, the International Monetary Fund (IMF) said on Thursday.
A report states that economic output in the countries using the single currency is now expected to rise by just 0.9% this year, according to an IMF report. This is 0.5 percentage points lower than had been forecast before the war, the IMF said in a statement
At the same time, headline inflation is expected to rise to 2.8%, which is 0.8 percentage points higher than forecast as recently as January.
According to IMF estimates, growth in 2027 is then expected to be 1.2%, 0.2 percentage points weaker than previously forecast. Economists now expect inflation to reach 2.3% - 0.4 percentage points higher than anticipated at the start of this year.
The Washington-based institution warned that a prolonged energy shock could further fuel inflation and inflation expectations, whilst a loss of confidence or financial difficulties could dampen demand. Meanwhile, a resurgence of the US war against Iran poses an additional risk.
IMF advises more ECB tightening if energy prices rise further
Due to concerns about stagflation, the IMF advised that the European Central Bank (ECB) must tighten key interest rates even more significantly than previously thought this year. On Thursday the ECB raised rates to 2.25% from 2% for the first time since 2023 and blamed the Iran war for the rate hike.
Should energy prices continue to rise, the ECB could be forced to intervene even more drastically, the IMF said.
Meanwhile, the IMF once again criticized European governments for providing broad-based relief to their citizens. The Washington-based institution had previously warned that non-targeted support disproportionately benefits higher-income households, which consume more energy.
EU reforms needed
To ensure greater resilience to crises in the future, the IMF also reiterated its calls for EU reforms. It argued that the European single market must be strengthened and dependence on global energy markets reduced.
In the face of an ageing society and weak productivity growth, the IMF warned against unilateral national action and protectionist industrial policy.
Planned EU requirements to increase local production of certain goods in Europe risked distorting market mechanisms and driving up costs. Instead, the focus should be on removing bureaucratic hurdles without undermining the hard-won standards of financial market regulation.
World Bank also revises eurozone outlook
The World Bank also revised its forecasts for the eurozone. It now expects economic growth of 0.8% this year, 0.1 percentage points lower than previously forecast. The reasons cited were higher oil and gas prices, which overshadowed the stronger economic performance at the turn of the year and lower US tariffs.
In 2027, however, growth is expected to be 0.1 percentage points stronger at 1.3%, as the World Bank anticipates stronger domestic demand as a result of falling energy prices. Furthermore, government support and investment, particularly in Germany, are expected to provide additional support for economic output. Growth of 1.3% is also forecast for 2028.
